Lawrence Summers on the economy

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>   (email exchange)
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>   On Mon, May 24, 2010 at 6:50 PM, wrote:
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SUMMERS: “FOR MILLIONS OF AMERICANS, THE ECONOMIC EMERGENCY GRINDS ON” – WH adviser Larry Summers spoke to the Johns Hopkins School of Advanced International Studies today: “[T]he observation that the economy is again ascending does not mean that we are out of a very deep valley. Far from it when we are nearly 8 million jobs short of normal employment and about $1 trillion – or $10,000 per family – short of the economy’s potential output and income and when recent events in Europe have introduced uncertainty into the prospects for global growth. Shortfalls in output and employment stunt the economy’s future potential as investment projects are put off and as the skills and work habits of the unemployed atrophy. This last point is especially important when for the first time since the Second World War the typical unemployed worker has already been out of work for more than six months. And behind these statistics lie millions of stories of Americans who have seen the basic foundations of their economic security erode. Beyond the economic projections and equations we economists make lie the struggles of communities devastated by the impact of this recession.Whatever the judgments of groups of economists about the official parameters of the recession and the growing signs of recovery, for millions of Americans the economic emergency grinds on.”

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>   So why doesn’t he damn well do something about it?
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Because we’ve run out of money.

US total payroll employees haven’t grown since 1999

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>   (email exchange)
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>   On Tue, May 4, 2010 at 10:24 AM, Scott wrote:
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>   Ugly chart.
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>   US total payroll employees haven’t grown since 1999
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Yes, hangover from the surplus years.

Deficits never have gotten high enough to restore demand/employment/output

In the 1990’s private sector deficits (increasing private sector borrowings) did the heavy lifting.

That proved unsustainable and govt has yet to make the necessary fiscal adjustment to remove the drag of over taxation/under spending.

Ed Harrison’s post

Out of control US deficit spending

By Edward Harrison

April 30 — Regular readers know that, while I have a little of what Marshall Auerback calls deficit terrorism in my DNA, I fully support fiscal stimulus as a means to arrest a deep downturn.

Yes, though I like to say ‘removing fiscal drag’ but same thing.

The horrendous Keynesian nightmare

My move into Keynesian mode came in December 2008 with Confessions of an Austrian economist. In fact, I have argued the ObamaAdministration needed to use more stimulus in early 2009, not less (see January 2009’s Obama’s stimulus bill is a tough sell so far as an example).

Yes, needed to remove more drag.

As early as February 2009, I argued that Obama took a middle road on stimulus and taxes that leads nowhere which would discredit stimulus as a policy tool. And that is indeed what has happened.

Agreed. Which would be ok if they recognized it and opted for further adjustment.

Now, of course many of you don’t feel that way because you share my visceral disaffection for deficit spending.

Given there is a ‘right size’ govt based on public purpose of the public sector, and not revenues, the fiscal adjustments fall on the tax side.

So I feel the visceral disaffection for the over taxation that comes from a too small deficit.

But I laid out where the US economy is headed without stimulus in “The recession is over but the depression has just begun” six months ago. And right now we are heading exactly where I said we would. Witness my last post on the economy “US GDP growth rate is unsustainable; recovery will fade”

Anyway, the point is that the US economy will not be able to sustain recovery for long without stimulus. The likely result of withdrawing stimulus is a recession that is deeper than the last one aka a major depression.

Yes, it sure looks like the shortfall in aggregate demand calls for an immediate fiscal adjustment.

Deficits as far as the eye can see

But right now, a lot of talking heads are trying to bamboozle people with tales of woe about hyperinflation and sovereign bankruptcy in the US to support specific claims about what deficit spending can and can’t do. Deficit hawks, in particular, are on the warpath – a completely predictable outcome since I anticipated it just as Obama was elected in November 2008 (see Beware of deficit hawks).

Agreed!

Of course the US deficits are too large. Come on: 10% deficits as far as the eye can see are unsustainable over the long-term.

I don’t see that. Especially if govt spending isn’t ‘forced’ into the economy which would be evidenced by a closing of the output gap.

Until the output gap closes, deficits are simply offsetting non govt ‘savings desires’ for dollar financial assets.

That is, deficits add directly to non gov savings and until those savings desires are saturated govt isn’t ‘forcing’ financial assets into the economy.

The key word, however, is long-term. However, no one seems to understand the difference between short-term and long-term and the debate has become an ideological free-for-all.

It would help if they realized there is not necessarily a long term problem either.

Earlier this month, I told you I am throwing in the towel on policy makers because it’s clear that Obama has been captured by the deficit hawks and we are headed for a painful recession within the next two years (maybe even as soon as next year).

Agreed!

Policy is exogenous and deficits are endogenous

So let’s stop talking about policy as if we are going to change anything. I started moving away from stimulus happy talk to focus on malinvestment in December of last year.

The policy debates aren’t working because the actual mechanics of a fiat monetary system are being obscured by ideological political debates. So, what I want to do is lay the foundations of modern money with you so we can strip away the politics and ideology from the economics.

The goal is to demonstrate that fiscal deficits and surpluses are endogenous to our economic system and depend on exogenous policy decisions which are inherently political and ideological.

Let me give you an example. What if we allowed the US economy to proceed without making one economic policy decision for the next two years? What would happen? The answer is that the government would have a fiscal deficit of X billions of dollars exactly matched by X billions of surpluses in the non-government sector (remember the sectors must balance). The deficit outcome is endogenous. It is a function of the inputs i.e. of the private sectors desire to save and the government’s spending decisions.

Agreed, as above.

On the other hand, government economic policy decisions are exogenous. They are input variables which alter outcomes. This is an important point because if we know how the monetary system works, then we can get a much better handle on how different policy decisions actually affect deficits and surpluses. And remember, policy decisions are almost entirely political. That is they are driven by ideological positions.

Agreed.

So, if I say to you that I am against government spending and it must be cut, this creates a specific outcome path. On the other hand, if I say I am pro-stimulus, this too creates a specific outcome.

Modern Money

Here’s how I am going to go about this one:

I went to a conference on Modern Monetary Theory (MMT) on Wednesday. Over the next few weeks, I will present some ideas from the Modern Money people (Randy Wray, Marshall Auerback, Bill Mitchell, etc). I’ll start the post titles with “MMT:….”

Yes, good to see you there!

I will take a somewhat antagonistic approach because I think that’s probably going to the best way to introduce this to people who have a more libertarian bent like myself.

Now, my bio says:

From an ideological perspective, Edward calls himself a libertarian realist: a firm believer in the primacy of markets over a statist approach. but not in an ideological way. Often government intervention and oversight is not just wanted but warranted.

What that essentially means is that when I think about government, I view it with suspicion and my inclination is to seek to limit its size and scope.

Yes, there is a right sized govt that serves public purpose that varies from person to person. It’s a political decision.

That means I have an innate disaffection for big government,

Ok, that’s a legitimate political position shared by tens of millions, and maybe a majority.

deficit spending,

That’s the size of additions to net non govt savings which can only come from fiscal balance. The political decision here is the outcome (growth, employment, etc.) Of the level of savings govt allows through its policy.

money printing,

That’s a gold standard term relating to the ratio of paper claims on the gold reserves to the actual gold reserves. It’s no longer applicable as originally defined, so needs to be redefined or otherwise specified.

For example, the fed buying securities is an exchange of financial assets, both of which generally fall under some monetary aggregate, at which level that aggregate remains unchanged.

etc. – but not in an ideological way. It all depends on the circumstances. (For instance, see “A brief philosophical argument about the role of government” and “A few thoughts about the limitations of government” which outline my ideological positioning).

So, my goal in this is to separate the policy and the politics from the mechanics of how our fiat money system operates. That way it will be clear what is actually happening in our monetary system right now and what is pure political posturing. You will also then probably see a lot of congruence between how I see the economic mechanics and how Marshall sees them. The difference, of course, is ideology.

The way I intend to position this is that Modern Money Theory economists are really the True Modern Money Operations economists because they present the true mechanics of modern fiat money operation, which I will show you.

Now, policy decisions are largely political, exogenous decisions about which informed decision-makers can disagree. However, if we aren’t at least informed about the mechanics of how modern money works, it is very difficult to have an intelligent debate about deficits, social security, fiscal stimulus or anything else for that matter.

I know that I have learned a lot from what the likes of Randy Wray and Bill Mitchell have said (remember, I studied economics in a time heavily influenced by the prevailing economic orthodoxy). I don’t ‘buy into’ a lot of what they propose on policy, but on modern money they have it right.

Agreed, though i probably support most of their policies as well. But not always.

The purpose is to present the underpinnings where we can all agree and separate it from the ideological piece. My ideological foil in this will be Marshall Auerback. Afterward, I hope we can have a framework from which to talk about the political piece.

I hope you enjoy the debate and a presentation of the ideas.

Looking forward to it, thanks!!!

Best,
Warren

Claims/Eur Gwth Surprise?


Karim writes:
Initial claims fell 11k to 448k, lowest level in 1mth.
Anecdotes supporting further declines ahead:

  • VIACOM CEO SAYS ECONOMY IS GROWING STRONGER EACH DAY
  • Caterpillar CEO: “We enjoy hiring people and growing our business, and we’re delighted to see that opportunity coming back”

EU Sentiment and Manufacturing surveys for April out today and quite strong (except for Greece)

  • Of note is stock of inventories at all-time low while new orders and production are rising
  • Wouldn’t be surprised to see 5-6% GDP growth in Q2 for Europe; of course may not be sustainable due to fiscal issues,etc, but should still be a surprise

Yes, if the ECB, for example, simply guaranteed the national govt debt it would work reasonably well. The automatic stabilizers would get the deficits to as high as needed to restore growth and employment.

But that would introduce the moral hazard issue, as whoever ran the largest deficit would be the winner in real terms, in an inflationary race to the bottom.

So they don’t want to remove the ‘market discipline’ aspect even though a nation can become insolvent before the deficit has a chance to get high enough to turn things around.

Interest Rates Have Nowhere to Go but Up – NYTimes.com

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>   (email exchange)
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>   On Sun, Apr 11, 2010 at 10:58 AM, wrote:
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>   What is your call?
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It’s certainly possible, but my suspicion is that we may be going the way of Japan, with interest rates low for very long. With core CPI going negative and the output gap/unemployment remaining very high, especially people who can’t find full time work hitting a new high of 16.9%, the Fed is far from meeting its dual mandate of full employment and price stability (along with low long term rates). And the recent dollar strength, stubbornly high jobless claims numbers, weak loan demand numbers, and not much sign of life in housing has to be a concern about the recovery being more L shaped than V shaped as well.

Seems the Fed would have to have some pretty strong forecasts for CPI and much higher levels of employment to move any time soon apart from perhaps going to what they consider a more ‘normal’ real rate of 1% or so.

And when I look at the euro dollar rates out past 5 years they’re higher than libor got in the last cycle, and this one doesn’t feel like it’s stronger than the last, at least so far. So to discount rates that high (well over 5%) as midpoints of expectations for fed funds looks high to me.

Consumers in U.S. Face the End of an Era of Cheap Credit

By Nelson D. Schwartz

April 10 (NYT) — Even as prospects for the American economy brighten, consumers are about to face a new financial burden: a sustained period of rising interest rates.

That, economists say, is the inevitable outcome of the nation’s ballooning debt and the renewed prospect of inflation as the economy recovers from the depths of the recent recession.

The shift is sure to come as a shock to consumers whose spending habits were shaped by a historic 30-year decline in the cost of borrowing.

“Americans have assumed the roller coaster goes one way,” said Bill Gross, whose investment firm, Pimco, has taken part in a broad sell-off of government debt, which has pushed up interest rates. “It’s been a great thrill as rates descended, but now we face an extended climb.”

The impact of higher rates is likely to be felt first in the housing market, which has only recently begun to rebound from a deep slump. The rate for a 30-year fixed rate mortgage has risen half a point since December, hitting 5.31 last week, the highest level since last summer.

Rasmussen polls

65% Now Hold Populist, or Mainstream, Views

55% Favor Repeal of Health Care Bill

I find his polls as good as any. He shows 54% favor repeal of the new health care law, with 70% of seniors against the Medicare cuts.

The lack of understanding of the monetary system is taking an increasing both economically, politically and socially.

With almost 20% of the workforce unable to find full time work, and near record low capacity utilization in general, our leaders saw fit to raise taxes and cut spending which will lower demand and undermine their political careers to ‘pay for’ a very modest spending increase of about $100 billion a year, and with delays, of the perhaps additional $1 trillion of fiscal adjustment needed to get us back to full employment in a reasonable time frame.

Also, part of the rise in costs goes to insurance reserves which are a demand leakage.

The politics get uglier by the day, and from watching the news over the weekend the loudest health care protest seems to be over the expense and how it will add to the size of the deficit. Seems this means more ‘fiscal responsibility’ is on the way, including letting the tax cuts expire next year and maybe even a VAT which is an absurdity under any circumstances, apart from a desire to cut consumption.

Add to that the reality of the eurozone actually offering Greece nothing of value, opening the way for wider credit spreads spreading to the entire eurozone.
It also looks like their combined deficits are now large enough for the added non govt financial assets to now be driving down the euro independent of the credit issues. This continues until exports increase sufficiently for the automatic stabilizers to tighten fiscal balances. They aren’t anywhere near there yet.
Additionally, the dollar index chart is beginning to pick up a bid from commodities traders as well.

Claims/Bernanke on asset sales


Karim writes:

Initial claims fall 14k to 442k; with downward revisions to past few weeks allowing 4wk avg of initial claims to move to 453.8k; the lowest since 9/08.

This is the part that Bernanke omitted in today’s testimony that was included in his Feb 10 testimony.

“I currently do not anticipate that the Federal Reserve will sell any of its security holdings in the near term, at least until after policy tightening has gotten under way and the economy is clearly in a sustainable recovery. ”

Now just has sequencing more open-ended:

“In any case, the sequencing of steps and the combination of tools that the Federal Reserve uses as it exits from its currently very accommodative policy stance will depend on economic and financial developments and on our best judgments about how to meet the Federal Reserve’s dual mandate of maximum employment and price stability.”

CPI/Claims

Interesting how years of 0 rate policies don’t seem to generate inflation.


Karim writes:

Data in past week (retail sales, Empire survey, claims, PPI, CPI) continues to show best of both worlds—economy improving and inflation very low.

Initial claims drop another 5k to 457k.

  • CPI unch on headline basis and +0.053% on core.
  • Core now 1.3% y/y and has a couple more mths of favorable base effects that should allow it to fall below 1%.
  • Core inflation running 0.1% on a 3mth annualized basis!
  • OER (unch) continues to hold down the series with apparel (-0.7%) the only notable outlier this month.

Employment


Karim writes:

Weather tough to gauge; 1mm missed work in Feb due to weather vs avg of 290k

BLS website saying you have to miss work for an entire pay period to not be counted on payrolls, and that ‘about half’ of all workers are on a bi-weekly pay period. All you can say about weather I think is that its impact on the number, whatever it is, is asymmetric. One of larger storms occurred during survey week of Feb 7-13. Census workers contributed 15k.

Other details that are positive:

  • Net revisions +35k almost offset drop in headline of -36k
  • UE rate stable at 9.687%, making it more and more likely we have peaked in UE rate
  • Diffusion index improves to 48 from 44.2
  • Part rate up to 64.8 (highest since November)
  • Median duration of unemployed down from 19.9 to 19.4 (lowest since October)

Negative details:

  • Hours worked -0.3%; but likely all due to weather
  • U6 UE rate measure (discouraged workers, working p-t but would rather work f-t, etc) up to 16.8% from 16.5%; but may also be related to hours situation last month.

We are likely to see more FOMC members embrace FRB Staff’s more optimistic forecast in the coming weeks.

Non-Mfg ISM//Payrolls


Karim writes:

All key components up; prices paid lower but still at high level.
Employment up 4pts and up 4.5pts relative to 6mth avg.

Hopefully, BLS can put a reasonable number on snowstorm impact on Friday.
Ex-snow and census workers, would look for +25-50k number.



Feb Jan
Composite 53.0 50.5
Activity 54.8 52.2
Prices paid 60.4 61.2
New Orders 55.0 54.7
Employment 48.6 44.6
Exports 47.0 46.0
Imports 48.5 47.0

WHAT RESPONDENTS ARE SAYING …

  • “Conditions for our business have substantially improved over the last three months.” (Information)
  • “We are proceeding with caution based upon the current market conditions.” (Public Administration)
  • “Business activity about the same as last month. Perhaps a slight increase in new orders for material and services — nothing major.” (Utilities)
  • “The overall unemployment and the net effect of housing [instability] continue to affect our business.” (Retail Trade)
  • “Business is okay. Customers are doing a lot of price shopping.” (Agriculture, Forestry, Fishing & Hunting)